Seven West Media warns of earnings drop in 2017

Seven West Media chief executive Tim Worner says securing the rights to the Olympics and AFL is important to the free-to-air broadcaster's long-term success, even though the high cost of the content will weigh on earnings in 2016-17.

At its full-year results on Tuesday, Seven warned that earnings before interest and tax would probably fall 15 to 20 per cent this financial year because of softer spending by advertisers and hundreds of millions of dollars the network must spend to broadcast the Olympics and AFL.

Markets reacted quickly to the bleak outlook with Seven shares plunging 18.4 per cent to 84.5¢ at close on Tuesday, down from a 12-month high of $1.225 hit in June. Rival Nine Entertainment was also hit, dropping 14.3 per cent to 93¢.

Seven West Media wants to monetise sports and other television across multiple devices, chief executive Tim Worner says. Louise Kennerley

Mr Worner conceded the outlook was not where the broadcaster wanted it to be. However, he said in the long term, premium sporting rights would help to grow the business by generating revenue from distributing the content on digital channels, not just television.

"[The Olympics is] such a big event that is going to allow us to learn a great deal. It's going to allow us to launch new shows, to launch new digital products and it's going to allow us to get set for monetising a stream of these big live sporting events in our future that we've locked up over time," he said.

Devices and platforms

The Olympics will be a testing ground for Seven as it tries to identify new ways to monetise not only sports rights, but the rest of its content, to address the shift of viewers to multiple screens and platforms.

"We probably won't see huge changes in where they're getting their revenue from in this Olympics but it will really test their ability to capture eyeballs in new ways and on different devices," Nikko Asset Management portfolio manager Michael Maughan said.

"The question is still how much does it cost them to procure and create this content and at the end of the day, can they continue to be as profitable as they are? That is the real test for the business model."

Mr Maughan said Seven will probably be looking at how its strategy of getting its content across as many devices and platforms as possible during the Olympics can translate to other sporting events, reality TV and even news and current affairs.

Seven's coverage of the Rio Olympics will extend to every event being either broadcast or streamed via Seven's "linear" broadcast channels or its Olympics on 7 app. It has also signed a number of deals with platforms such as Twitter and Snapchat to help maximise audience and advertising performance.

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"Every time we mentioned [the Olympics] we want to think about what is the new operating model for Seven West Media," Mr Worner said.

"It's not for me to comment on our share price, but it is for me to say that the market is beginning to recognise the long-term benefit of what we've got going on here ... We're going to go and get the rights to these big live events and we're going to monetise them in many more ways than we used to."

Seven said the advertising market remains short, particularly given this month's Olympic Games. Seven is forecasting the television advertising market for the 2017 financial year to be flat to down in the low single digitals.

"With this stock, the big question is still around the TV market and it's very hard to predict when that tide away from TV media to other media is going to turn. They've set their guidance on the basis that it's not going to happen this year, but they hope that it will," Mr Maughan said.

Revenue from Seven's program sales and third parties productions surged 92 per cent to $88 million and the broadcaster is forecasting greater than 25 per cent growth in the coming year.

"It's already at about 20 per cent of our earnings in television and we can confidently predict that number will grow," Mr Worner said.

Seven's productions will continue to grow as an important part of the business and is on the verge of announcing further production ventures in Britain and New Zealand.

"It's quite a few years ago that we set off on this path of becoming more and more of a content company and less and less of a broadcaster," Mr Worner said.

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Max Mason is The Australian Financial Review’s Media & Marketing editor. Based in our Sydney newsroom, Max is an award-winning journalist with nearly a decade of experience across a range of major publications. Connect with Max on Twitter. Email Max at max.mason@afr.com